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China, U.S. near deal on ZTE reprieve; Beijing cuts auto tariffs

BEIJING (Reuters) - Washington neared a deal to lift its ban on U.S. firms supplying Chinese telecoms gear maker ZTE Corp, sources said on Tuesday, and Beijing announced tariff cuts on car imports, further easing trade tensions between the world's two largest economies.

The reprieve for ZTE, hit by a seven-year ban in April that had crippled its operations, could include China removing tariffs on imported U.S. agricultural products, as well as buying more American farm goods, two people briefed on the matter told Reuters.

The sources declined to be identified because the negotiations are confidential.

Representatives for the U.S. Treasury and Commerce departments did not immediately reply to a request for comment. White House representatives also did not immediately reply.

ZTE, based in the southern Chinese city of Shenzhen, did not immediately reply to requests for comment.

Washington and Beijing stepped back from the brink of full-blown trade war after talks last week, with the United States appearing to set aside for now its demands that China revamp key planks of its industrial policy in exchange for buying more farm products.

U.S. President Donald Trump has adopted a more conciliatory stance in the trade dispute with China as North Korea, whose chief ally is Beijing, has called into question a summit planned for next month in Singapore with Trump.

Many in the U.S. government and in industry are dismayed that Trump appears to be backing off his tough stance on forcing China to open its markets more and tackle what they see as China's unfair trade and market access practices.

Some in the U.S. government and business community have said they opposed what they saw as a clear-cut legal case against ZTE being used as a bargaining chip in the broader trade conflict.

Republican Senator Marco Rubio, who has been critical of Trump's moves toward ZTE, blasted his administration over the reported agreement for having "surrendered" to Beijing and pledged that Congress, led by Trump's fellow Republicans, would seek to block any deal with the company.

"Making changes to their board and a fine won't stop them from spying and stealing from us. But this is too important to be over. We will begin working on veto-proof congressional action," Rubio said in a pair of tweets on Tuesday.

The steep cut in import tariffs for autos and car parts follows China's pledge last month to open its car market, the world's largest, that included a timeline to remove long-standing caps on foreign ownership of automotive ventures.

Import tariffs will be cut to 15 percent for most vehicles from 25 percent from July 1, the Ministry of Finance said, a move likely to boost carmakers that ship high-end cars to China, such as Tesla Inc and German giants BMW and Daimler AG's Mercedes-Benz. Tariffs for auto parts would be cut to 6 percent from mostly about 10 percent.

'HANDSHAKE DEAL'

White House advisers have previously said the ban against ZTE was being reexamined, and the firm would still face "harsh" punishment, including enforced changes of management and at board level.

One source told Reuters there was a "handshake deal" on ZTE between U.S. Treasury Secretary Steven Mnuchin and Chinese Vice Premier Liu He during talks in Washington last week that would drop the ban in exchange for purchase of more U.S. farm products.

The second person said China might also eliminate tariffs on U.S. agriculture products it assessed in response to U.S. steel duties, and that ZTE could still be forced to replace its leadership, among other penalties.

The ZTE deal, while not yet cemented, was likely to be finalised before or during a planned trip by U.S. Commerce Secretary Wilbur Ross to Beijing next week to help reach a broader pact to avert a trade war, both sources said.

ZTE, which is publicly traded but whose largest shareholder is a Chinese state-owned enterprise, had been hit with penalties for breaking a 2017 agreement after it was caught illegally shipping U.S. goods to Iran and North Korea, in an investigation dating to the Obama administration.

American companies provide an estimated 25 percent to 30 percent of components in ZTE's equipment, which includes smartphones and gear to build telecommunications networks.

In May, Trump signaled a stunning reversal on ZTE when he said he would help the company get "back into business, fast", saying the ban would cost too many jobs in China.

Chinese officials had made the issue a key focus of their demands during talks in Beijing this month, threatening to halt talks on broader two-way trade disputes unless Washington agreed to ease the sanctions, sources said at the time.

'HOSTAGE RELEASE'

Chinese officials had viewed the U.S. punishment as an attack exposing their country's dependence on imports of key technologies.

"The release of hostage ZTE will be the start of China and the U.S. to implement their trade agreements," Hu Xijin, editor in chief of the Chinese state-backed Global Times tabloid, said on his Twitter account after news of the deal.

Washington and Beijing both claimed victory in trade talks on Monday as the world's two largest economies agreed to hold further talks to boost U.S. exports to China.

Over the weekend, both pledged to keep talking about how China could import more energy and farm commodities from the United States so as to narrow the $335-billion annual trade deficit in U.S. goods and services with China, although details and a firm timeline were thin.

The Chinese government's top diplomat, State Councillor Wang Yi, will stop in Washington on Wednesday on his way back from Argentina to "exchange views on China-U.S. bilateral relations", China's Foreign Ministry said on Tuesday.

(Reporting by Michael Martina; Additional reporting by Se Young Lee and Ben Blanchard in BEIJING; Adam Jourdan in SHANGHAI; and Susan Heavey in WASHINGTON; Writing by Tony Munroe; Editing by Christopher Cushing and Clarence Fernandez)